San Antonio office market offers value, but corporate magnets lacking

Jason Schnittger has some advice for those looking to sell an office building in San Antonio.

“Put the words ‘Value Add’ in the tagline,” says Schnittger, senior vice president of the San Antonio office of Stream Realty Partners LP — a full-service real estate firm that provides brokerage and development services.

Schnittger recently spoke with the Business Journal about the state of the city’s office market — about its strengths and some of the challenges still out there.

Some good news: The local office sector is luring more investors.

A key factor — San Antonio’s inventory of value-add assets (properties that are good buys as is but offer the potential of higher income streams with upgrades).

As prices for properties in the larger core markets rise, many buyers are finding themselves priced out of those cities, says Schnittger. So now they are turning their attention to secondary markets — like San Antonio.

And as office investors tune into the Alamo City, many do so with a specific target asset in mind — the properties with upside potential.

The recent sales of Center Plaza and Centerview Crossing speak to the attraction of the value-add asset, says Schnittger. Meanwhile, more buildings that fall into this category are coming back on the market — properties like the Spectrum Building and Northwest Center, he adds.

“Buyers are trying to get a higher set of returns,” Schnittger says.

They are looking to buy older buildings at a low price, upgrade them, and raise the rents — and thus get a good return on their investment. Given the number of value-add properties that make up the local office market, San Antonio could be a hot spot for investors for some time.

But the same fixer-upper factor that makes San Antonio a good market for investors also makes it a less attractive market for the large corporations looking to move or to expand their operations.

“There are very few high-quality, large blocks of office space that are attractive to Corporate America,” says Schnittger.

San Antonio has enjoyed several relocation coups over the past several years — snagging corporate operations from companies such as Medtronic and Petco. But it will be harder for the city to attract that caliber of office user going forward because the high-quality buildings are not out there to attract them.

“There’s a disconnect in the market,” Schnittger says. “We need more high-quality (office) space. ... It’s an imbalance of supply and demand.”

Hand slap

The current state of the country’s financial markets is part of the problem. Lenders were a lot more willing to finance speculative development prior to 2008 and the onslaught of the Great Recession.

“So many banks got their hands slapped (in the wake of the crash),” Schnittger says.

But in putting the brakes on all lending for speculative projects, financial institutions have made it difficult for those markets that didn’t get over-run with high-risk development. “Banks are looking at what’s happening in other markets, and applying it to San Antonio,” Schnittger says, “instead of taking (lending decisions) on a market-by-market basis.”

The financial markets are loosening up — for investors. Lenders, however, remain skittish of the development side of the real estate business.

“There is some very attractive financing out there,” Schnittger says. “We just haven’t seen the ability to do spec.... You would see people doing it if it was able to be done.”

Another challenge to speculative development are the leasing practices in San Antonio. “San Antonio has not been a pre-leasing market, because you don’t have a large core of corporate America already located here,” Schnittger explains. It’s not until the walls go up that many tenants sign their leases.

So in a financial environment that dictates a significant amount of pre-leasing before financing new development, San Antonio is at a disadvantage.

“It might have to change for the short term if anyone is going to get development on the ground,” he says.

By the numbers

New York-based the International Council of Shopping Centers (ICSC) reports that gift-card sales for the 2012 holiday season are expected to reach $110 billion.

Citing research by Arlington, Va.-based advisory firm CEB TowerGroup, ICSC reports that about $40 billion will be spent on “open loop” cards from American Express, Discover, Mastercard and Visa. These cards can be used anywhere, hence the term open loop.

Retailer and restaurant gift cards will account for another $36 billion and $19 billion in sales, respectively.

In other retail news, outplacement firm Challenger Gray & Christmas Inc. reports that retailers added 465,000 seasonal workers in November — a new record for what is typically the busiest hiring month of the holiday season, according to the Chicago-based firm. By comparison, retailers added 383,700 seasonal workers last November.

More seasonal workers could also mean more sales revenues — “as more Americans have more spending money in their pockets for gifts,” notes John A. Challenger, CEO of Challenger Gray & Christmas.